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October 15, 2008
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Wednesday
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Shawwal 15, 1429
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In new era, US to buy $250bn in bank stakes
NEW YORK, Oct 14: The United States ushered in a new era in banking on Tuesday with plans to take equity stakes worth up to $250 billion in financial institutions, an incursion into the private sector that US officials called a regrettable last resort.
The US government followed European powers that agreed to recapitalise their banks a day earlier, triggering a global stock market rebound that continued on Tuesday when Wall Street rallied 4 per cent at the open before falling back.
Moreover, relief was evident in money markets with inter-bank costs for overnight rates falling for the second day in a row, a sign that lending may be picking up.
“This is an essential short-term measure to ensure the viability of America’s banking system,” US President George W. Bush said in a televised address. “These measures are not intended to take over the free market but to preserve it,” Bush said.
The US Treasury will buy non-voting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept limits on their pay, and standards of corporate governance.
Bush also said the Federal Deposit Insurance Corporation would guarantee new bank debt, temporarily insure senior preferred debt issued by banks and thrifts, and that the Federal Reserve would become a buyer of last resort of commercial paper — the debt instruments companies use to fund activity.
The US measures are intended to stimulate inter-bank lending and the commercial paper markets, whose stagnation may have already pushed the US economy into recession. Former US Federal Reserve Chairman Paul Volcker said the world’s biggest economy was already in recession.
The chief executive of one of the world’s biggest private equity firms said on Tuesday the injection of government cash into US banks, alongside similar measures around the world, could break the back of the credit crisis.
“We will be looking today to an absolute sea change in the global financial system in terms of liquidity,” Blackstone Group CEO Stephen Schwarzman told a private equity conference in Dubai.
This could be the action that “breaks the back of the credit crisis,” he said.—Reuters
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